Falling Prices, Legal Battle Cut Texaco Net

Texaco said Wednesday that slumping crude and product prices and fallout from its multibillion-dollar legal battle with Pennzoil Co. contributed to cut its first-quarter profit by 64% from a year earlier.

The White Plains, N.Y.-based oil company, the nation’s third-largest after Exxon and Mobil, said it earned $118 million in the first three months of this year.

Revenue for the three months totaled $8.5 billion, down 11% from the earlier period.

Texaco earlier this month sought Chapter 11 bankruptcy protection from creditors, the biggest company ever to do so, citing the possibility it might have to post a multibillion-dollar bond to continue its legal battle with Pennzoil.

A sharp plunge in crude prices in the 1986 first quarter, combined with a partial recovery in the latest three-month period, contributed heavily to sharply lower earnings in Texaco’s refining and marketing, or “downstream” sector, James W. Kinnear, the company’s president and chief executive said.

“In early 1986, crude oil prices fell at a faster rate than the decline in petroleum product prices, which enabled the downstream refining and marketing operations to realize strong gross margins,” he said. “The current situation is exactly the reverse of the 1986 period.

“These increased crude acquisition costs could not be fully recovered in the marketplace, thus causing an erosion in the company’s downstream operating margins in 1987 as compared to 1986,” Kinnear said.

In the first quarter this year, Texaco said its refining and marketing operations earned $6 million, down 98% from last year’s like period.

Lower product prices hurt domestic and overseas earnings. But that “was offset somewhat by the strengthening of major foreign currencies in relation to the U.S. dollar, as well as the comparative decrease in crude oil and product acquisition costs,” Kinnear said.